Skip Links

Service Navigation

How can we create a fair tax system?

A mathematical prodigy, James Mirrlees spent most of his rural Scottish childhood in solitude, solving the tricky problems he found in a never-ending pile of books. At Cambridge, he realized that his mathematical skills could help solving real world-problems, and decided to enter the world of economics. Mirrlees became a pioneer of information economics, working - for example with Nobel laureate Peter Diamond - on economic transactions with limited (or asymmetric) information. His specialty: transactions "between you and the government", more commonly known as paying taxes.

At a glance

Playing it safe: His wife Patricia says that when receiving the Nobel Committee’s phone call, "Jim politely suggested that it didn’t sound very likely and he’d need some proof."

Missed opportunities: He never met his co-laureate William Vickrey, who died a few days after the announcement of the 1996 Nobel prize

Hong Kong’s best: He’s found the only place in Hong Kong where you can get German-style bread (but we forgot to ask for the address, damn)

Encouraging economic wellbeing

Mirrlees’ most important achievement is establishing an optimal income taxation theory, building on the work of his co-laureate William Vickrey. "Some people are very productive and have a rather high wage rate," Mirrlees explains. "Other people will not be able to earn such a high wage rate, in many cases because they can’t quite do something a higher-level lawyer or a computer programmer can do." But in a world of income inequalities, how can you create a tax system that’s fair and at the same time incentivizes people to be productive?

The desire to create a system that generates as much economic wellbeing as possible is a common one, with ideas rooted in the real world, but the question of how to do this is, says Mirrless, a mathematical one. And he was the ideal candidate to find an answer. Utilizing his complex methodological approach, he argued that there’s an important trade-off between equality and efficiency, and that it’s too easy to simply take the most from people with the highest incomes.

What could an optimal tax system look like?

Though the numerical results of his model came out with relatively flat tax rates compared to the tax systems in use, Mirrlees adds how his assumptions have changed due to new information available. "We’ve learned more since then, and if you use a more realistic view, most of the tax systems you come up with are u-shaped. You have higher marginal tax rates for low incomes and higher marginal tax rates for high incomes, but lower ones in the middle."

Not ready for retirement

Mirrlees has been living in Hong Kong since 2002. One reason he decided to leave Britain was that there was a fixed retirement age at the University of Cambridge, where he was a professor. And he wasn’t ready to retire. Plus, he thought it was a great opportunity to get close to the Chinese economy, which was at that time developing fast. "I’ve always been very interested in developing countries. Nobody would call Hong Kong a developing country now, but it was very close then."

It has been roughly 40 years since the Cultural Revolution ended with the death of its leader Mao Zedong in 1976. Slowly but steadily, China has opened itself up to the world economy. The key to development is the production of labor-intensive goods with cheap labor, and developing agriculture, giving the land back to its people.

It’s a great achievement in China that they’ve reduced extreme poverty.

Global warming: an existential threat

Today, the International Monetary Fund lists China as the world’s second largest economic power. Nevertheless, the figures are a little different when looking at the UN Human Development Index, which ranks countries according to life expectancy, education and per capita income. But Mirrlees notes that wages are rising. Though growth rates are very hard to predict precisely, he assumes that urban wages in the big Chinese cities will change dramatically. However, he underlines that it’s not simply about whether people will be enjoying higher incomes.

China is likely to face the consequences of global warming - flooding in the coastal belt. At the moment, it doesn’t look as though countries are going to adopt sufficiently severe policies to avoid that.

How did China become one of the world’s top economies?

Mirrlees sees many things today from a different perspective. Events that are not everyday news in Europe have become more important to him: territorial disputes in the South China Sea, for example, or the struggle between Japan and China. He also thinks a lot about the situation of Chinese citizens and frequent human rights abuses. "In the 1990s, there was growing freedom for intellectuals in the country. That’s certainly not true now," he admits.

Get new questions as they launch

Do people in Hong Kong need to be braver?

Living in Hong Kong is different from living in mainland China, of course. Mirrlees finds himself in the middle of an interesting, and potentially dangerous, development. While China is trying to gain more and more influence in its administrative region, he says that "A lot of the people I talk to have a very strong sense of being Hong Kongers. I wouldn’t be surprised if they would very definitely vote, given the opportunity, for a maximum degree of independence." Does Hong Kong need more brave people then? Mirrlees smiles. "That depends on how utilitarian you are about these things."

Dealing with real-world problems

Throughout his academic career, Mirrlees has always been interested in development economics. "It’s about getting rid of poverty and poor education," he explains. "How could that not be an important area?" This wasn’t the only reason he left Cambridge for the Chinese University of Hong Kong, but it was his motivation for changing from mathematics to economics when pursuing a PhD. Though Mirrlees continued to work on highly complex mathematics, he got the chance to deal with real-world problems, too.

These real-world problems continue to occupy Mirrlees’s attention. Though he admits that his colleague Angus Deaton has a lot more to say about the topic of foreign aid, for example, he’s come across some notorious examples as well. "It’s clear that a lot of aid projects are a total waste," he admits. He remembers a World Bank report on how investment projects in Africa had performed. "The answer was that they had done pretty badly." The problem was that the success of the people in charge of finding projects to support, was measured by how much money they succeeded in spending. "So they kept wanting to find projects that could be made to look good." But this doesn’t do any good to a country’s economic wellbeing, he emphasizes.

Is there a way for African countries to somehow copy what China has done, a strategy that has been very successful so far? Mirrlees hesitates, arguing that there is no easy answer to the question of sufficient methods for developing countries. "Bring in people with real expertise," he suggests, a small, first step towards a better solution.

The Eurozone; the "sick man" of Europe

Mirrlees, who is Scottish by birth and who, in 1998, kneeled before the Queen, is far from home. But of course he knows what’s going on. He’s a member of the Council of Economic Advisors to the Scottish Government and, as such, he was involved in discussions about the independence referendum in 2014. He looks at Europe concerned, though Brexit doesn’t give him nightmares. "It may take a little while," he suspects.

But I think it’s hard to argue that Brexit is an economic catastrophe. I think it’s more troubling politically and culturally.

When talking about the Eurozone he holds the rather pessimistic view shared by many of his fellow laureates. To Mirrlees, the Euro was a bad deal right from the start, and solutions to the economic crisis get harder and harder every day.

The Euro - a very bad deal

If there’s a solution for the Eurozone, it includes severe measures to increase demand. Cancellation of austerity policies, for example. But also, and here Mirrlees gets back to the topic closest to him: wealth taxation, and reducing taxes for average citizens. "I don’t know why they’ve found it so hard to do something sensible about taxes."

The joy of fatherhood

When asked what has made him most proud, Mirrlees struggles to find an answer. Pride is not a natural word for him to use. He remembers how his childhood environment was deeply rooted in the Presbyterian tradition, where pride was almost the worst of sins. The father-of-two explains how he felt "great pleasure" when solving the problem of optimal income tax - but there’s maybe a different, rather personal story to tell, a story of true accomplishment and joy. "What I particularly remember about the Nobel prize ceremony is my daughter sitting in the audience," Mirrlees says with a huge smile on his face. "I’d never seen anyone look so absolutely happy and delighted. And that was a very special moment."

See how UBS can help

Whether it's about investments, your business, or anything to do with your financial future

Tools & Services

Further Links

Doormat

Products and services mentioned on these web pages may not be available for residents of certain nations. Please consult the sales restrictions relating to the service in question for further information. http://www.ubs.com

Wealth management services in the United States are provided by UBS Financial Services Inc., a registered broker-dealer offering securities, trading, brokerage and related products and services. Member SIPC. Member FINRA. UBS Financial Services Inc. is also registered as a Futures Commission Merchant (FCM) with the U.S. Commodity Futures Trading Commission (CFTC) and offers brokerage services related to the execution and clearing of on-exchange futures and options on futures products. Member NFA